IHS study: Permian single-handedly sustaining domestic oil activity

Published 6:00 pm, Saturday, January 9, 2016

Rigs stacked at a business 20 miles west of Farm-To-Market Road 1788 photographed Tuesday, Feb. 24, 2015. Reporter-Telegram, James Durbin

Rigs stacked at a business 20 miles west of Farm-To-Market Road 1788 photographed Tuesday, Feb. 24, 2015. Reporter-Telegram, James Durbin

IHS study: Permian single-handedly sustaining domestic oil activity

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If there is a bright spot in an oil and natural gas economy hard-hit by low commodity prices, it is the Permian Basin.

The Permian, popular for its established infrastructure, stacked play potential and strong economics, has been so popular it merited its own study from the energy research firm IHS Inc.

In the report, IHS writes, “In an energy market struggling from oil price declines and anemic financial returns, the Permian Basin is the only U.S. unconventional liquids resource seeing significant year-over year, per-well productivity gains. The Permian is single-handedly helping to sustain activity and has caused the region to become a hotbed of consolidation.”

Jerry Eumont, managing director, North America Supply Analytics Service at IHS Energy, and a co-author of the Permian Basin consolidation analysis along with Reed Olmstead, senior manager - North America Supply Analytics Service at IHS Energy, said there is no question the Permian has been impacted by the plunge in oil prices.

Not even the Permian can withstand $30 oil prices, he said.

“There’s very little that’s economic at $30,” he said by phone from his Houston office.

He predicted that the further fall in oil prices will result in operators cutting back even further and forcing more consolidation.

“We’ll see more acquisitions as guys with stronger balance sheets take over distressed companies,” he said. “If you have an edge and can perform better, you’ll have the opportunity to expand.”

In fact, IHS expects consolidation in the Permian to occur at a greater rate than other domestic plays, according to Olmstead.

The good news is Permian Basin operators will be in a strong position to grow once oil prices recover, Eumont said. And prices will recover, Eumont said.

Expectations at IHS are that domestic crude oil production will fall 600,000 barrels by the second half of this year, beginning to tighten supplies and support oil prices, he said. Prices are expected to be in the high $50s by the end of the year and continue to rise, according to Eumont.

“It’s taken awhile for production to drop” and there have been concerns about Iran adding 500,000 barrels a day of crude to an already over-supplied market, Eumont acknowledged. He added that “U.S. production is very competitive on the worldwide stage except against the Middle East.

According to the IHS report, peak productivity in the Permian Basin has improved by more than 40 percent since the third quarter of 2014, led primarily by the Bone Spring play in the Delaware Basin.

“The Bone Spring has been around forever and it has been consistent. The Bone Spring has been quietly, behind the scenes, performing quite well and even outperforming the Wolfcamp,” said Eumont. It has even outperformed the Eagle Ford and Bakken, he said.

“Everyone is going back and finding ways carbon has moved through rock, got trapped and they’re finding ways to get it out. People from all around the world will come to the Permian Basin and learn how to replicate its success,” Eumont said.

The Permian’s 40 percent improvement has not gone unnoticed by operators or the marketplace, which has shown a preference for Permian deals, the report said. In 2015, over 35 percent of deals were focused on the Permian Basin.

“More than 1,000 operators have generated new volumes from the Permian since January 2014,” said Olmstead in releasing the report. “At the other end of the spectrum, more than 650 operators are generating less than 3,000 barrels per day in the play.”

Considering all Permian deals, the Midland Basin of the Permian has seen slightly higher 1P reserve valuations recently, bringing the play average up from $13 per 1P (proven) barrel of oil equivalent (BOE) of reserve to nearly $18. By contrast, the IHS report said, Eagle Ford 1P reserves have seen recent valuations closer to $15 per BOE. The “Permian Premium” indicates the upside expected from the play, as productivity continues to increase.

“Premiums do not appear to have topped out, meaning companies looking to do business in the basin may pay even higher prices in the future,” said Olmstead.

While over 1,000 operators have generated new volumes in the Permian, only 10 are responsible for over 50 percent of the combined liquids in the region. Eumont listed them as Occidental Petroleum, Concho Resources, Pioneer Natural Resources, Apache Corp., Cimarex Energy, Devon Energy, Kinder Morgan, Energen Resources, Chevron and Exxon Mobil.

“The Permian Basin is positioned well and over time will be one of the better-performing basins. It will take time, but the Permian Basin will be a big growth engine for U.S. production.

“If they can just withstand low oil prices, Permian Basin companies will do well,” he said.